What causes poverty?

On another forum, there was an argument about raising minimum wage. Some people were saying it is a good idea because it puts more money in the pockets of the lowest income people (this is true). Some said it was potentially bad because it would force layoffs since it would dramatically increase the labour cost to run a business (this is also true). A small group of people argued something that really struck me as interesting. They claimed that raising minimum wage would increase the amount of money the lower class has, which would increase their demand on goods, which would cause inflation, which leaves those lower class people in the exact same position of poverty they started in. If you think about it, this absolutely makes sense. If people have more money, it lowers the value of that money, which means you need more money, and the cycle goes on. For example, a Mexican may earn $1 per hour in Mexico, but he can buy food for $1. An American will earn $5 per hour, but his food costs $5. The American earns 5x as much as the Mexican, but he is not any wealthier.

This being said, how do we fight poverty? If we throw money at poor people, it will cause inflation. Not only does that not help poor people, but it hurts middle and upper class people because their savings are worth less and less with each passing day, unless they have it invested properly.

Microeconomics predicts that the supply and demand for a good, labor in this case, will naturally approach an equilibrium price (wage) and quantity supplied (amount of labor hours purchased). If the minimum wage law is set to a price that is below the equilibrium price, it doesn't matter, because everyone is getting paid that higher equilibrium price. However, if the minimum wage law is set above the equilibrium price, then there are already problems, because the market is losing efficiency by not being able to approach the equilibrium... businesses buy less labor and there is not enough work for people who want to work. Raising the law even higher should make these problems worse.

But, personally, I think microtheory is so far removed from the real world, it's ridiculous. Hundreds of thousands of people, maybe even millions, are paid below minimum wage in tip jobs. Microtheory can't handle gratuities, because the good supplied is some very ambiguous notion of quality of service, and tips can vary based on how rich one is.

Minimum wage jobs also tend to be those that have labor unions who are already working on higher wages. If the unions can't get the wage increases, the company can hire other people who will work for less. It may not sound pretty, but working for less is their competitive advantage, and those people have a right to compete. And if people don't like that, well, they can start their own businesses and purchase labor at a higher price. I'm sure they'll get a lot of applications.

At the macroeconomic level, where inflation is studied, things are different, which is what you were getting at. There are many forces pushing on inflation, so any one force generally does not cause a problem. It's when many forces affect inflation that widespread economic trouble ensues. The Fed watches out for this and messes with the price of money to counteract. The minimum wage is not high enough to be a problem, IMO, which is why Republicans are capitulating.

So go ahead and raise the minimum wage. People should not be working in those jobs anyway. Wage jobs are for teenagers and robots. If people lose those jobs and the economy slows down, good, it's the sign of a dying business model and the rise of a new one. Maybe the stakeholders will invest in more profitable ventures, get more education, or even start their own businesses. Or businesses plural. Get a blog and sign up for GoogleAdsense and sell your old junk on eBay while you're at it.

Staff: Mentor

On another forum, there was an argument about raising minimum wage. Some people were saying it is a good idea because it puts more money in the pockets of the lowest income people (this is true).

Well, some of those people because:

Some said it was potentially bad because it would force layoffs since it would dramatically increase the labour cost to run a business (this is also true).

Yes, that's true.

A small group of people argued something that really struck me as interesting. They claimed that raising minimum wage would increase the amount of money the lower class has...

That is not true because of what you already stated above. If wages and unemployment go up, the total amount of money available to the lowest of the low remains roughly unchanged. And like you said - any possible actual increase will result in inflation. The net result could actually be that raising the minimum wage could lower inflation adjusted incomes.

(that's actually a relatively minor nitpick - either way, you get to about the same place).

This being said, how do we fight poverty?

Simple answer: you motivate the poor to better themselves by not paying them to remain poor. Bill Clinton did one good thing during his term (imo) and that was welfare reform. And most democrats hated him for it. But it was a near unqualified success because it motivated people to better themselves, which is the only real way to make change (from within). http://www.usatoday.com/news/nation/2006-07-17-welfare-reform-cover_x.htm

The law signed by President Clinton on Aug. 22, 1996, has transformed the way the nation helps its neediest citizens. Gone is the promise of a government check for parents raising children in poverty. In its place are 50 state programs to help those parents get jobs.....

In the 12 years since caseloads peaked at 5.1 million families in 1994, millions have left the welfare rolls for low-paying jobs. Nearly 1 million more have been kicked off for not following states' rules or have used up all the benefits they're allowed under time limits. Today, 1.9 million families get cash benefits; in one-third of them, only the children qualify for aid. About 38% of those still on welfare are black, 33% white and 24% Hispanic.

The effects of forcing people to find their own way are undeniable:

Three in four families on welfare are headed by unmarried women. As a result, employment rates for all single women rose 25% before declining slightly since 2001. Earnings for the poorest 40% of families headed by women doubled from 1994 to 2000, before recession wiped out nearly half the gains. Poverty rates for children fell 25% before rising 10% since 2000.

Even with the cyclical losses, the numbers are absolutely staggering: a 15% drop in child poverty in 12 years? A 50% rise in income for the lowest 40% of unmarried women? Rediculous! Awe inspiring.

More (its a great article, and only a week old):

When Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act, conservatives celebrated and liberals screamed; three administration officials quit their jobs in protest. The act ended a 60-year-old federal guarantee of cash aid for the poor.

The law, modeled on state pilot programs begun in 1994 with federal approval, was intended to prod welfare mothers and fathers into the workplace with a series of carrots and sticks. Work, and you got help with child care, job training, transportation. Refuse, and you risked sanctions and being cut off by time limits.

A decade later, the worst fears of liberals haven't materialized. States did not enter what critics feared would be a money-saving "race to the bottom." Thousands of poor children did not wind up "sleeping on grates," as Democratic senator Daniel Patrick Moynihan predicted.

Major employers hired thousands of welfare recipients. UPS hired 52,000; CVS/pharmacy hired 45,000, 60% of whom remain. Welfare offices have shed the look and language of their first 60 years for the aura of job-services agencies.

Nearly 70% of all single women are working, compared with 66% of married women, a reversal of the past. Single women's incomes have risen, thanks in part to the expansion of the earned income tax credit, a tax break of up to $4,400 for low-income workers. Child poverty rates have dropped, particularly among blacks and Hispanics. Teen pregnancies are down. Child support collections are up.

"Everything has worked," says conservative Douglas Besharov of the American Enterprise Institute. "Every critique one might have is about what could have gone better, not something that has gone poorly."

The case examples are interesting too - by in large, the people the tracked since 1994 have a positive opinion of the change. They recognize that while it was tougher for them in the beginning, they are better off in the end - and the country is better off with them working instead of getting paid not to work. And they recognize it and feel a sense of accomplishment. They are in a separate article: http://www.usatoday.com/news/nation/2006-07-17-welfare-three-families_x.htm

Then: In 1996, Perry walked into the Allentown, Pa., welfare office two months after President Clinton had signed the welfare overhaul. At 25, she had three children under 8, the offspring of three fathers who lived in three states. She lived at a Salvation Army shelter. She had no car, no child care and almost no cash. She was told to seek work, housing, child support and a high school equivalency diploma.

"I don't have a problem with it," she said. "I think it's about time for me to get working."

Now: In the years that followed, Perry spent time in two homeless shelters, a friend's home and her grandmother's house. She had a fourth child, now 7, by a fourth man. She got her General Educational Development (GED) diploma and a subsidized, four-bedroom apartment.

Her kids attend public schools, have a dog and get small allowances. Now 35, she's making $6.25 an hour at Burger King.

On July 24, she'll reach a year on the job — her longest ever in one place — and become eligible for health care benefits.

"I'm still not financially established the way I want to be. I'm still trying to figure out what I want to do," she says.

But the changes in welfare "showed me how to be a stronger person and a better role model for my kids," she says.[emphasis added]

Frankly, I'll never understand why Clinton did this, but it is almost enough, on its own, to make him a decent President. If history forgets all the negatives and remembers only this, I actually won't mind.

And ironically, this probably makes Clinton responsible for the marginalization of the Democratic party since his term.

A small group of people argued something that really struck me as interesting. They claimed that raising minimum wage would increase the amount of money the lower class has, which would increase their demand on goods, which would cause inflation, which leaves those lower class people in the exact same position of poverty they started in.

I wish macroeconomics were this easy. Your reasoning above hardly justifies the use of the words "exact same".

Also, here is a simple fact about supply and demand wrt the labor force.

There are many, many small towns in the US - perhaps thousands - that are primarily sustained by one large factory or business. The people who live in these towns have roots, family, and a way of life. They are also too poor to move.

The factories often work these folks like slaves for chicken wages. Every time that I go to one of these places, and I have seen many, I thank God that I'm not in their employee's shoes. Then you see the boss pull up in his Ferrari...